Fitch Predicts Rise In Bad Debt Charges For Australian Banks In 2018

01/19/2018

Fitch ratings has warned that Australian banks would be put under pressure o the issue of charges for bad loans which is slated to rise and face greater scrutiny from a royal commission. This is expected to put Australian banks under the grind in 2018.

The various economic trends that would negatively impact the Australian banking industry was cited to be among the reasons for the credit ratings agency to maintain a "negative" outlook on the banking sector, adding warnings of greater "pressure" on profit growth, amidst more than $30 billion in combined earnings being chalked up by the big four banks last year.

"Profitability is likely to slow in 2018, reflecting low interest rates, slow asset growth, competition for assets and deposits, higher funding costs, and a rise in loan-impairment charges," it said in an outlook report.

Despite the warnings, the ratings agency is of the view that compared to many other banks in other parts of the world, Australian banks would still remain "very profitable" because of the fact that increase in costs for the banks due to bad loans would be more manageable.

The ratings agency further noted that the debt to disposable income for the average household in Australia had touched new record highs even with a cooling down of the very high property prices in Sydney and Melbourne. This high ratio has placed the borrowers at much greater risks of debt failure in case there is a rise in costs of borrowing or lending rates.

About two thirds of the all of the loans given out by the major banks in Australia was against residential property. However, the ratings agency report stated that only in the eventuality of a sharp rise in rates of interest or a drastic fall in employment would there be any impactful reduction in the mortgage asset quality or the residential properties.

"Household debt reached nearly 200 per cent of disposable income at September 2017. Combined with low wage growth and high underemployment, this leaves households susceptible to higher interest rates and deteriorating labour market conditions," the report said.

The problems in the Australian retail sector could also create problems for the corporate loan books of the banks. However, the report noted that only about 4.8 per cent of the total debt exposure of the banks was to the retailers and wholesalers and therefore the risk would not be widespread.

Additionally, after new rules were put in place for balance sheet strength, there would likely be reduced pressure on banks to build up capital in the forthcoming year compared to previous years.

Earlier, a report from Morgan Stanley analyst Richard Wiles stressed on the fact that capital management would be "in focus" for the banks and suggested that the buyback for ANZ Bank would be enhanced from $1.5 billion to $3 billion this year.

Profits could also be challenged by the royal commission to be led by former High Court judge Kenneth Hayne, Fitch said.

"Any loss of trust may lead to higher wholesale funding costs, which in turn could intensify competition for deposits and push up funding costs for the entire system," the report said.